If your income bounces up and down throughout the year, budgeting is still important. Actually, you could say it’s even more important to have your finances well planned out… Because during those low (or no) income months, you’ll need to have enough money saved to cover your regular expenses.
So here is a step by step guide on how to budget if your income varies from month to month!
Step 1: Start tracking your income and expenses
Whether you’re a freelancer, gig worker, or small business owner, it’s not unusual for your income to vary tremendously from one month to the next. That’s why the first step in budgeting on a variable income is to get well acquainted with your income and expenses.
The best way to do this is to take a look at what you’ve earned and spent over the last six or so months. You can print out your credit card or bank statements, or track it using a free software like Empower or Credit Karma (used to be called Mint!). Here’s a full article on how to track your spending if you’ve never done it before.
Analyzing all this information will help you gain a better understanding of your finances. Add up all the money you’ve made over the period of time you’re examining. Then divide it by the number of months you’ve analyzed to come up with your average income. For example, if you’ve received $44,867 over the past 8 months, this would be an average income of $5608 per month.
Do the same with your expenses as well to calculate your average monthly spending. While we won’t be using this to make our main budget, this is helpful information to know. Plus, it can help you to plan for tax season if you need to withhold money for yourself!
Next, identify the month where you had the lowest income. We’re going to use this as your “baseline” income for our budget!
Step 2: List out all of your monthly expenses
Now, it’s time to list out all your monthly recurring expenses. You’ll want to group them into categories like housing, food, transportation, shopping, etc.. Be sure to include any subscriptions, insurance, and phone or cable payments.
For irregular expenses (like a bi-annual car insurance bill), you’ll need to set up sinking funds. Sinking funds are a way to budget for larger sporadic expenses. Things like car and home maintenance, or holiday gifts, which don’t necessarily adhere to a set schedule. To create them, simply divide the amount of money you’d like to save for the purchase by the number of months until you’ll need it. This then becomes your savings goal each month. Easy, peasy!
Don’t forget about taxes! If you have varying income there’s a good chance you’re a freelancer, gig worker, or small business owner. If that’s the case, be sure to also include money to be set aside for quarterly payments and for tax-filing season so that you aren’t caught off guard! It’s a good idea to leave a bit of extra cushion.
Related: 11 Money Tips for Freelancers and Gig Workers
Step 3: Categorize your Expenses into Wants and Needs
Next, it’s time to think long and hard about which of your expenses are needs, and which of them are wants. When you have irregular income, during dry months you may not be able to afford that fancy meal delivery kit, or your favorite subscription service. However, regardless of your income, you’ll need to pay your rent or mortgage.
So spend some time dividing your expenses into wants and needs. When making your standard budget based on your baseline income, incorporate your needs first. And then add in a few wants if your budget can accommodate it.
Then make a list of “nice to have” line items, like subscriptions, an entertainment fund, clothes, etc. When you have some extra money, you can add these into your budget for the month.
Step 4: Include Your Savings Goals
If you haven’t already, it’s a good idea to prioritize building up your emergency fund. Having 3-6 months worth of expenses saved up is a great way to be prepared for swings in your income. And it’ll ensure you don’t need to go into debt should an emergency pop up!
Next, write out your savings goals. We recommend setting aside 10-20% of your income for retirement, in both high and low paying months. “Paying yourself first” is a rule we believe in, no matter your income level.
When budgeting for savings goals, treat them like expenses. Purposefully funneling money towards these important financial goals is the only way to build wealth for your future! Savings should be a priority above “wants.”
Related: How to build wealth with a small income
Step 5: Create Your Budget!
Next, it’s time to put pen to paper and actually create a budget with all this information. You can go old school with a manual notepad, create your own spreadsheet, or even use budgeting software like YNAB to help you.
If you’re completely new to budgeting, definitely check out our full beginner’s guide which drills down even further.
There are many different budgeting methods, but for a variable income it may be best to use a zero based budget. With a zero based budget, every dollar you earn will be given a specific job. You can’t spend money you don’t have, and you must “spend” any funds that are left over.
Begin by taking your baseline monthly income, then subtract all the monthly expenses you’ve listed out. If your expenses are more than your monthly average income, you have a big problem… Sometimes with varying income you’ll have temporary deficit months when your spending is lower than your earnings. But, if this happens too regularly without you fully taking notice, you’ll be slowly digging yourself into a hole. You’ll need to either find ways to earn more income, or cut out some of your expenses ASAP.
If your income is much higher than your expenses, this is great news. You can allocate some of that leftover money to fast track your savings goals, or splurge a little more in the ‘wants’ categories. Just beware of lifestyle creep!
Example Budget on Variable Income
John drives for Uber during the day, and bartends at night. His income differs from month to month depending on how many tips he gets as well as how much he drives for Uber that month. In some high months he makes a whopping $7,000, but in other less lucrative months he makes as little as $2,500.
After looking back over the past 12 months, John calculates that he made a total of $52,000 in income for the last year. This works out to be about $4,333 per month.
John’s expenses look like this:
Rent: $1,200
Car/gas/insurance: $1,000
Food/restaurants: $600
Taxes (sinking fund): $500
Retirement savings: $600
All other stuff: $433
TOTAL: $4,333
Even though John’s income will go up and down from month to month, as long as he doesn’t blow his monthly average spend of $4,333, things will even out throughout the year.
All in all, if John makes the same income as he made last year, and sticks to this budget each month, he’ll make exactly $48,000 and spend $48,000. He will also have saved $7,200 for retirement and have enough to fully cover his tax bill too.
Step 5: Make Adjustments from Month to Month
When budgeting with variable income, you might need to take a little more of a “hands on” approach versus a “set it and forget it” budgeting style. Not only will you need to change your budget from month to month based on your projected income, but you’ll likely need to open up your budget and make some adjustments throughout the month.
If you make more than you expected to in one month, you can pop into your budget and add that money in. Made an extra $50? Maybe you can work in one of those “nice to have” expenses. Get your nails done, go out to eat, or hey- why not use it to boost up that emergency fund to add more padding and reduce stress? 🤓
Conversely, if you make less than expected, say a client cancels on you, hop into your budget and make a few cuts where you can to keep from spending more than you’ve earned that month.
The point is, your budget needs to be a little flexible when your income isn’t concrete. Because life usually doesn’t go in a straight line – there are ups and downs. You’ll have more success if you are open to small tweaks and changes as the month goes along.
Step 6: Work Towards Getting a Month Ahead (or 2-3!)
Once you get the swing of budgeting with variable income, it’s a good idea to get a few months ahead in savings. At minimum, you should be paying for this month’s expenses with last month’s cash. But really, we want you to get at least 2-3 months ahead.
This will make your financial life less stressful because you won’t have to worry about specific bill dates or accidently overdrafting your account as money comes in and out. Plus, you can budget based off of a set amount you’ve already earned as opposed to projected income.
Once you’ve fully funded your emergency fund, create a sinking fund to get a month ahead. Each month, funnel some money towards saving an extra month’s worth of expenses and spending money. Once you have this, use this reserve to pay for your current bills. Then, you’ll use this month’s earnings to budget for next month. And so on, and so forth!
Related: How to get out of the living paycheck to paycheck cycle
Step 7: Create a “buffer” during high performance months
Lastly, if you want to be able to keep your lifestyle more or less the same during the good and the dry months, work towards creating a much bigger buffer. Essentially, in addition to your emergency fund and getting a month ahead, you can take money from those months where you’re flushed with cash, and save it for longer periods when you earn less.
This means that you can opt to hold onto that Netflix subscription, or still funnel that same amount of money towards your sinking fund each month. Plus, you won’t have to make as many changes to your budget from month to month. You’re basically using the extra cash you’ve saved up during your busy months to give yourself a set salary! This is the ideal way to live when your income is variable.
Tips for Success
While budgeting with variable income does have its quirks, there are a few tips and tricks you can use to simplify the process. Over time, as you get the hang of it, it’ll become second nature!
Use A Budgeting Software to Help
If you find the budgeting process overwhelming, or just don’t have a lot of time on your hands, investing in a low cost but high quality budgeting software can help save you time and money.
Our favorite budgeting software is YNAB, or You Need A Budget. It costs $14.99 per month, or you can purchase an annual subscription for $99 per year. It’s also FREE for students!!) Although it costs money, on average its users save over $6,000 in the first year using the software!
YNAB helps you to automate part of the budgeting process by tracking expenses alongside your income. It can help you save valuable time in the budgeting process, freeing you up to spend more time on the things that matter to you!
Practice Mindful Spending
When we practice mindful spending, we take a step back before every purchase to consider how it will fit into our lives. It also helps us align our spending better with our values. When you have a variable income, it becomes even more important to develop mindful spending habits.
Before making a purchase, it’s important to think about how it will impact you over the course of a few months. For example, if you’re thinking of buying that new gaming console, it’s probably not a good idea to do it right before your slow season. Ask yourself, if you buy this now, will it hurt you in a few months time? Will it put you at risk of not being able to cover your baseline expenses?
Here’s a great flowchart of questions to consider → Should you buy it?
Negotiate Your Bills
When budgeting for variable income, it can be a good idea to try and get your baseline expenses as low as possible. A great way to do this is by negotiating your bills.
Although it can seem intimidating, negotiating your bills is a great way to advocate for yourself financially. No one else will ever do it for you, and it’s a great way to fight back against price hikes.
Call up businesses like your cable, phone and internet providers and ask if they have any new customer promotions you can take advantage of. If they say they aren’t able to help you, try asking for the customer retention department. Check out and use some of these tactics to ask for a discount.
If they refuse to throw you a bone, be prepared to walk away. Often, switching companies every few years can lead to the maximum amount of savings. Although it can seem like a hassle, it’s almost never as frustrating as we imagine it to be.
Create a Bare Bones Budget
In case you fall upon an extremely slow couple months, or lose some of your gig work, it’s a good idea to create a bare bones budget to fall back on. A bare bones budget includes only your bare essential expenses, like food, transportation, insurance, debt payoff and housing.
This budget is not meant to be sustainable long term, because it doesn’t include any of your wants. However, it can be a total lifesaver if you suddenly lose your job. Or if you have a lower than usual income in a given month. By creating a BBB ahead of time when you don’t necessarily need it, you’ll be ready to switch over to it immediately should you need to.
Don’t Automate Your Payments
While automating your finances can be a great move for some folks, if you have variable income it may be best to skip this piece of personal finance advice. Since you might not have set pay dates, automating your finances could lead to you getting stuck with one of those pesky overdraft fees, especially if you haven’t built up a meaningful savings buffer.
Instead, create a money date each month, where you can review your finances and pay all of your bills. Grab your favorite takeout meal or beverage, and take care of those financial “to dos.”
Fully Fund Your Emergency Fund (and then some!)
Lastly, when budgeting for a variable income, your emergency fund becomes even more important. Since your income is not set, it is possible for you to get struck with a financial emergency during one of your slowest months.
Instead of having a basic emergency fund of just $2,467 in cash, prioritize saving between 3 to 6 months of expenses and stick it in a high yield savings account. In fact, we would suggest leaning closer to that 6 month goal post. Your independent contractor job or small business might have more financial upside… But since your career has less stability, fully funding your emergency fund can ensure you’re covered no matter what.
The Bottom Line:
You can still achieve your greatest financial goals with an income that changes drastically throughout the year. However, without budgeting it’s easy to overspend in those flush months, leaving you high and dry during leaner times.
Creating a budget tailor made for your variable income situation is a great way to manage those swings. It’ll make sure you can always make ends meet, as well as save for the future!
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Thanks so much for this helpful post. I’ve been self employed for 7 years with quite a low and very variable income. So grateful for this post and have taken it all on board and finally feel like I’m in control of my money, instead of years of it slipping through my fingers.